2016 / 2017

About Yuan Kathy

Title: Multi-Asset Noisy Rational Expectations Equilibrium with Contingent Claims 

Written in collaboration with Georgy Chabakauri and Konstantinos Zachariadis.

Abstract:

Her research focuses on developing new asset pricing theories with heterogeneous information and market frictions and testing their empirical implications. In the past few years, she has examined how crises spread through international financial markets and how introducing benchmark securities such as treasury bonds or stock indices improves the overall market liquidity. She is currently working on modeling systematic risk using network theory, studying higher order beliefs and strategic complementarities in the financial market, building dynamic and multi-asset REE models of asset prices with short-sale and borrowing constraints, constructing new metrics for performance evaluations, and developing new asset pricing tests based on revealed beliefs in investor portfolio holdings.

Date: Thursday 13th October, 13:00 - 14:00

Event Location: Room W4.03, Cambridge Judge Business School

Title: The Real Effect of Financial Innovation: Evidence from Credit Default Swaps Trading and Corporate Innovation

Abstract:

We document that credit default swaps (CDS) trading on a firm’s debt positively influences its technological innovation measured using patents and patent citations. The positive effect is more pronounced for firms relying more on debt financing, borrowing from banks, borrowing from fewer bank lenders, having more restrictive debt covenants, or using more short-term debt prior to CDS introduction. Further analysis shows that firms’ innovation strategies become more risky and long-term oriented after the advent of CDS trading. These results suggest that CDS foster borrowing firms’ innovation via enhancing lenders’ risk tolerance and borrowers’ risk taking in the innovation process. Taken together, our findings reveal the real effects of financial innovation (i.e., CDS) on companies’ investment and technological progress.

Date: Thursday 27th October, 13:00 - 14:00

Event Location: Room W4.03, Cambridge Judge Business School

About Peter Conti-Brown

Title: Going Negative: The Legal, Institutional, and Political Case for Negative Interest Rates at the U.S. Federal Reserve

Written in collaboration with Miles Kimball (university of Colorado-Boulder).

Abstract:

For nearly a decade, global central banks have battled a “new normal” of low inflation and low growth. To combat these dynamics, some central banks—the Bank of Japan, the Swiss National Bank, and the European Central Bank, among others—have pursued a policy of dropping their target interest rates below the zero lower bound. Conspicuously absent from this group is the Federal Reserve, despite facing similar economic headwinds that suggest that negative interest rates could be more effective than other policies the Fed has pursued. In this paper, we provide the not merely the economic case for negative interest rates (although we summarize the evidence and theory) but discuss the main barriers that face the Fed in adopting this policy: law, politics, and institutions. We discuss the technical landscape that the Fed will encounter, and discuss the path the Fed can pursue well short of seeking legislative amendment to the Federal Reserve Act.

Date: Thursday 10th November, 13:00 - 14:00

Event Location: Lecture Theatre 3, Cambridge Judge Business School

About David Lando

Title: Safe-Haven CDS Premiums

Abstract:

We develop a model in which a derivatives-dealing bank faces capital charges from uncollateralized swap positions with sovereigns, and buys Credit Default Swap (CDS) contracts to obtain capital relief. CDS premiums depend on margin requirements for buyers and sellers of CDS contracts, the value of capital relief for the dealer banks, and the return on a risky asset. We explain the regulatory requirements that lead derivatives dealers to buy CDS and translate volumes of derivatives contracts outstanding between sovereigns and banks into CDS hedging demand. We argue that CDS premiums for safe sovereigns are primarily driven by regulatory requirements.

Date: Thursday 24th November, 13:00 - 14:00

Event Location: Castle Teaching Room, Cambridge Judge Business School

Please Note: This Seminar Was Cancelled, The Entry Below was held in its stead.

Date: Thursday 26th January

About Bart Lambrecht

Title: The Dynamics of Investment, Payout and Debt 

Abstract:

We develop a dynamic agency model of a public corporation. Managers underinvest because of risk aversion and a binding governance constraint. They smooth rents and payout. They do not exploit interest tax shields fully. The interactions of investment, debt and payout decisions can change drastically depending on managers' preferences. Managers with power utility set investment, debt and payout proportional to the firm's net worth, generating a constant debt ratio. With exponential utility, investment decisions are separated from decisions about debt and payout. More profitable firms become cash cows and less profitable firms accumulate debt, as in a pecking order model.

Date: Thursday 26th January, 13:00 - 14:00

Event Location: Room W4.03, Cambridge Judge Business School

About Zhi Da

Title: Harnessing the Wisdom of Crowds

Abstract:

We examine the impact of herding on the accuracy of consensus earnings forecasts from a crowd-based forecast platform (Estimize.com). By tracking user viewing activities, we monitor the amount of information a user views before she makes an earnings forecast. We find that the more public information a user views, the less weight she will put on her private information. While this improves the accuracy of each individual forecast, it reduces the accuracy of the consensus forecast, since useful private information is prevented from entering the consensus. Predictable errors made by “influential users” early on persist in the consensus forecast and result in return predictability at earnings announcements. To address endogeneity concerns related to information acquisition choices, we collaborate with Estimize.com to run experiments where we restrict the information set for randomly selected stocks and users. The experiments confirm that “independent” forecasts lead to a more accurate consensus and convince Estimize.com to switch to a “blind” platform from November 2015. Overall, our findings suggest that the wisdom of crowds can be better harnessed by encouraging independent voices from the participants.

Date: Thursday 9th February, 13:00 - 14:00

Event Location: Lecture Theatre 1, Cambridge Judge Business School

About Agostino Capponi

Title: Bail-ins and Bail-outs: Incentives, Connectivity, and Systemic Stability

Abstract: 

We analyze the stability of an interbank network, in which rescues in the form of subsidized bail-ins or public bailouts can be coordinated to stop financial contagion. The coordination of a rescue consortium between a benevolent social planner and the banks is modeled as a sequential game. We show that the equilibrium welfare losses are generically unique, depending heavily on the network structure, which influences whether or not the social planner's threat to not intervene is credible. We provide conditions under which the threat is credible and characterize the optimal intervention plan. Our analysis shows that sparsely connected networks may enhance financial stability in two ways: (i) a smaller amplification of the shock without intervention may enhance credibility of the social planner's threat and (ii) because default resolution costs are concentrated, the creditors of defaulting banks can be incentivized to make large contributions to a subsidized bail-in. This may make a sparsely connected network socially preferable over a more densely connected network, even if the densely connected network is financially more stable in the absence of any intervention.

Date: Thursday 23rd February 13:00 - 14:00

Event location: Room W4.03, Cambridge Judge Business School

Title: Contagion in the CDS Market

Abstract:

This paper analyzes counterparty exposures in the credit default swaps market and examines the impact of severe credit shocks on the demand for variation margin, which are the payments that counterparties make to o set price changes. We employ the Federal Reserve's Comprehensive Capital Analysis and Review (CCAR) shocks and estimate their impact on the value of CDS contracts and the variation margin owed. Large and sudden demands for variation margin may exceed a firm's ability to pay, leading some firms to delay or forego payments. These shortfalls can become amplified through the network of exposures. Of particular importance in cleared markets is the potential impact on the central counterparty clearing house. Although it is a central node according to conventional measures of network centrality, the CCP contributes less to contagion than do several peripheral firms that are large net sellers of CDS protection. During a credit shock these firms can suffer large shortfalls that lead to further shortfalls for their counterparties, amplifying the initial shock.

Date: Thursday 9th March, 13:00 - 14:00

Event Location: Room W4.03, Cambridge Judge Business School

About Erwan Morellec

Title: Product Market Competition and Option Prices

Abstract:

Most firms face some form of competition in product markets. The degree of competition a firm faces feeds back into its cash flows and affects the values of the securities it issues. We demonstrate that, through its effects on stock prices, product market competition also affects the prices of options on equity and naturally leads to an inverse relationship between equity returns and volatility, generating a negative volatility skew in option prices. Using a large sample of U.S. equity options, we provide empirical support for this finding and demonstrate the importance of accounting for product market competition when explaining the cross-sectional variation in option skew.

Date: Thursday 4th May, 13;00 - 14:00

Event Location: Room W4.03, Cambridge Judge Business School

About Ulf Axelson

Title: Sequential Credit Markets

Abstract:

Entrepreneurs who seek financing for projects typically do so in decentralized markets where they need to approach investors sequentially. We study how well such sequential markets allocate resources when investors have expertise in evaluating investment opportunities, and how surplus is split between entrepreneurs and financiers. Contrary to common belief, we show that the introduction of a credit registry that tracks the application history of a borrower leads to more adverse selection, quicker market break down, and higher rents to investors which are not competed away even as the number of investors grows large. Although sequential search markets lead to substantial investment inefficiencies, they can nevertheless be more efficient than a centralized exchange where excessive competition may impede information aggregation. We also show that investors who rely purely on public information in their lending decisions can out-compete better informed investors with soft information, and that an introduction of interest rate caps can increase the efficiency of the market.

Date: Thursday 18th May, 13:00 - 14:00

Event Location: Room W4.03, Cambridge Judge Business School

About Katrin Tinn

Title: Learning Through Crowdfunding

Written in collaboration with Gilles Chemla.

Abstract:

Abstract: We develop a model where reward-based crowdfunding enables firms to obtain a reliable proof of concept early in their production cycle. The information gathered from a subsample of backers through a fixed length pre-selling campaign enables firms to update their beliefs about the preferences of all future consumers. This creates a valuable real option as firms invest only if updated demand is high. Further, such updating mitigates moral hazard: the higher the funds raised, the lower the firms' incentives to divert them. Our results are consistent with stylized facts and provide new testable implications.

Date: Thursday June 1st, 13:00 - 14:00

Event Location: Room W4.03, Cambridge Judge Business School

About Geert Bekaert

Title: Macro Risks and the Term Structure of Interest Rates

Abstract:

We use non-Gaussian features in macroeconomic data to identify aggregate supply and demand shocks for the US economy, while imposing minimal economic assumptions. Recessions in the 1970s and 1980s were driven primarily by supply shocks while later recessions were driven primarily by demand shocks. The Great Recession exhibited large negative shocks to both demand and supply. We then estimate "macro risk factors" that drive "bad" (negatively skewed) and "good" (positively skewed) variation for supply and demand shocks. The Great Moderation, a general decline in the volatility of many macroeconomic time series since the 1980s, is mostly accounted for by a reduction in the good variance risk factors. In contrast, the risk factors driving bad variance for both supply and demand shocks, which account for most recessions, show no secular decline. Finally, we find that macro risks significantly contribute to the variation in yields, bond risk premiums and bond return variances. While overall bond risk premiums are counter-cyclical, an increase in demand variance is associated with lower risk premiums on bonds.

Date: Thursday 15th June, 13:00 - 14:00

Event Location: Room W4.03, Cambridge Judge Business School